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If a stock’s log returns (i.e. change in log cost per unit time) adhere to a Gaussian distribution, and if its net returns (i.e. % alter in value per unit time) have mean m and common distribution s, then a lot of finance students know that the imply log returns is m-s2 /two. That is, the compound development rate of the stock is m-s2 /2. This can be derived by applying Ito’s lemma to the log value method (see e.g. Hull ), and is intuitively satisfying since it is saying that the anticipated compound development rate is lowered by danger (“volatility”).
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